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I recently took my two sons to the planetarium show at a local museum. We sat together in the darkness, unable to see our hands in front of our faces, and got lost in the allure of the night sky: planets, constellations, comets and the spectacular collisions that happen when two objects try to occupy the same space at the same time.

Those collisions took me back to the late ‘90s, shortly after I joined a telecom reseller. We were rapidly growing, expanding our portfolio into hardware and IP telephony. As we designed our comp programs, we intentionally focused on total customer monthly recurring revenue (MRR) to offer the promise of unlimited earning opportunity, which we were certain would attract the sales talent required to drive our growth. And yet time after time, I watched proven hunter sales reps begin to focus on renewals and client service, ignoring the upside from new logos or the one-time payouts from our new hardware solutions.

As I think about my current clients, many of whom are contemplating how to compensate subscription sales like software as a service (SaaS) or struggling to manage compensation for both subscription and one-time sales, I can’t help but think of that experience. The specific challenges vary, and while best practices and benchmarks are helpful, there is no silver bullet to solve these issues. But there is a blueprint—a constellation of five points that will help you get this right, and avoid the collisions that can obliterate a sales team.

1. Organizational strategy and priority

A compensation plan must support the organization’s strategy, objectives and priorities. The plan must balance short-term bookings, revenue and profit targets, and growth expectations by solution area, while creating a foundation for long-term success. It’s no easy task.

Foundational decisions that form the basis of a good compensation plan design include organizational culture, sales (bookings) and revenue planning, target setting, portfolio priorities (e.g., should we focus on SaaS or license?), conversions and cannibalization, change management, and transition planning.

2. Customer coverage

Those collisions when I worked at the telecom reseller illustrated the power of incentives to drive behavior, and the reality that you get what you pay for. We hired hunters, gave them prospects, talked all day about new logos. Yet a plan based on total MRR made retaining the base annuity more of a priority than new logos or the one-time payouts from new solution areas. In essence, that comp plan made them behave like farmers.

Tech companies go to great lengths to develop the right blend of generalists and specialists to sell across products, industries, and customer types and to define the specific responsibilities of each during the sales process. As a result, we should think differently about looking at sales professionals as specialist versus generalist, or a pure hunter versus a farmer who owns acquisition, expansion, and retention using the entire portfolio. Decisions and expectations around role and responsibility of design, allocation, and territory definition are instrumental in ensuring a plan that enables, rather than destabilizes, the intended organizational design.

3. Plan metrics and deal valuation

If there is a single benchmark that most organizations seek, it is the metric. But aligning the organization and its related processes (e.g., quota setting) with the right metrics is not simple. There are industry norms for metrics like MRR, as well as personal perspectives on metrics and legacy systems that are entrenched regardless of their effectiveness. Changing these can be difficult—for stakeholders, new metrics may be seen as too significant a change, happening too fast, and simply unwelcome deviations from a comfortable routine.

But while foundational measures like MRR and annual revenue or contract value are most prevalent for subscription sales, there are alternatives (e.g., total contract value), secondary metrics (e.g., total billed revenue), and metric variations (e.g., term multiplier adjustments). Organizations, particularly those with competing models, need to consider single versus discrete measure trade-offs, as well as organizational culture, simplicity, valuation, and what is appropriate based on the role and engagement process.

4. Sales crediting

With metrics that can support the strategy, role, and engagement process, the final decision is determining when and how a sale becomes commissionable. Crediting challenges related to subscription sales typically fall into one of three categories: lack of visibility, financial alignment, and salesperson motivation.

It is easy, for example, to aspire to pay all hunters on sales within a defined territory at the time of the sale, and for the full value of the deal. Doing so, however, assumes the company has this ability, is financially indifferent, and open to certain levels of risk. It is important to explore visibility challenges, credit timing and splits, revenue recognition rules, organizational versus individual alignment, and compensation cost of sales, and to look at how each of these factors helps establish a practical, transparent and motivational crediting policy.

5. Planning and operations

Ultimately, the real value of a compensation plan design is measured by how it’s received, understood, and trusted by the sales teams. Poor communication, black boxes, a lack of visibility, and calculation errors can create significant distraction or disruption in the field. Because of this need to connect with sales teams, effective and efficient plan administration must be table stakes.

Organizations, partners and strong salespeople will also require an ability to understand the impact of product forecast or mix changes, sales coverage, territory, quota or crediting changes, and how transitions will roll out when changes happen.

Compensating subscription sales can result in nuanced plan mechanics or tracking requirements resulting in complex plan administration. Organizations that are able to manage this have typically invested in robust platforms to provide confidence, efficiency and insight. Done wrong, collisions will erupt all around you. But if you get your compensation for subscription sales right, you’ll see a spectacular show light up across the widest reaches of your universe.

About the Author

Kyle Heller, Manager at ZS Associates
in San Mateo, Calif., and is the Sales Compensation leader in ZS's High Tech practice. He is a Certified Sales Compensation Professional (CSCP) whose expertise includes plan design, goal setting, plan administration and plan health checks.
Kyle is a frequent speaker at sales compensation conferences and previously co-chaired ZS Associates' Compensation Conference. In addition, Kyle has authored several articles on incentive plan design best practices and trends. Prior to ZS, Kyle worked for more than 10 years in sales and marketing leadership positions, with an emphasis on developing and managing alternate sales distribution channels in the telecommunications industry. Kyle holds bachelors degrees in accounting and management from Alvernia College, and an M.B.A. from the Haas School of Business at the University of California at Berkeley.
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One thought on “Subscription sales: Five steps to fixing a recurring problem”

Another good post. Recurring problems of the sales world means there are emerging incompatibilities inside and outside your team. The result of your works is cause by all factors; from your end as the sales hunter, customer’s acceptance and understanding, as well as the companies role in supporting it’s sales team. I agree with the steps stated above. In shows the importance of the sales team including the company functioning as a whole, as unified system. Fixing recurring problems are tangible, no such errors are not reformable. Just like with the new group I join a week ago. http://www.invisume.com/ transforms group of sales professional to work as a team and focus on doing one common goal, give quality service to the companies in a systematic, hassle-free, privately way. Even with the presence of these recurring problems, http://www.invisume.com/ provides the sales team with the opportunity to explore and use their skills in solving any shortcomings, problem in sales. Try to check it out..